Lessons From the Market Correction

By Quentin Fottrell

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As Pay Dirt reported yesterday, some brokerage houses have extra staff manning the phones and taking questions from panicked investors. The Dow fell 634.76 points on Monday amid worries about a double-dip recession — making it the steepest single-day plunge since 2008. Are you asking the right questions? And are you happy with the answers? We asked executives at Vanguard, Fidelity Investments, Morgan Stanley Smith Barney and the owners at two boutique advisory firms for their answers to a few of the big questions anxious clients have been asking over the last 24 hours.

Is this 2008 all over again?

“Not even close,” says Jeff Applegate, chief investment officer for Morgan Stanley Smith Barney. “That was caused by the completely unexpected bankruptcy of the largest investment bank on the planet. The markets literally froze.” In 2011, he says bank lending and inter-bank lending is very much intact. Velda A. Eugenias, president and CEO of Eugenias Advisory Group in Northeast Alabama, says, “2008 was like a forest fire,” she says, “it was long overdue and necessary for the cleansing that every so often must be done.” This time, Eugenias says, Americans were not riding high on low unemployment and unrestrained confidence in the banking system. She says investors were far more prepared: “This is more like an aftershock.”

Should I get out of stocks?

Investments should be made on economic fundamentals, says Blaine Dunn, owner of Dunn Financial Advisors in Winchester and McLean, Va., and the same is true this time around. “That has not significantly changed in a day,” he says. He says stay in stocks until the volatility is over, and then reassess your position based on whether you can stomach the risk. Experts say the same is true for worried baby boomers. John Sweeney, executive vice-president of planning and advisory services at Fidelity Investments, says that even if you’re in your 60s, you’re still planning for 30 years in retirement, so their baseline asset allocation should still be around 50% equities to provide some growth (with 40% fixed income and 10% short-term instruments).

Where can I go for safety?

“Safety is a relative issue,” says Fran Kinniry, a principal at Vanguard’s Investment Strategy Group. “It all depends on whether you are investing for retirement, college or even a wedding,” he says. He recommends U.S. Treasuries and money markets as the safest markets you can find at the moment, but also warns of “purchasing power risk” in money markets. “Ask yourself if you will get enough growth to spend those investments in the future,” he says. Applegate also points to U.S. Treasuries as the go-to place for safety, and describes the reaction by investors to the Standard & Poor’s downgrading of the U.S.’s Triple-A credit rating as “extremely ironic.” Defensive stocks are also worth considering: Eugenias recommends fast-food companies McDonald’s and Wendy’s and Dunn says Procter & Gamble and Johnson & Johnson offer relatively stable earnings in a time of economic uncertainty.

Should I be worried?

In short: No. All of the experts say you should not make decisions based on fear. Eugenias says ride out the storm. After, she says clients should ask themselves questions like, “Should I have been so aggressively positioned?” She says, “Money is not made from panic selling – it is lost from it.” Sweeney believes the U.S. will meet its debt obligations and the economy will continue to grow. Applegate says investors will closely watch the special Congressional committee. The committee will be charged with finding debt cuts of at least $1.2 trillion over the next decade. He has high hopes it will be run by “adults not children” when its members are chosen: “Democrats and Republicans who are moderate and who can compromise over ideological positions.”

The money quotes:

Kinnery on portfolio changes: “We don’t know where the bottom is we’re not really good at forecasting the future. The advice is to stay the course on your asset allocation.”

Sweeney on the debt downgrade: “Countries that have had their Triple-A credit rating downgraded by a credit ratings agency have historically weathered through that.”

Eugenias on weathering the storm: “If you buy an airplane ticket and the captain says, ‘We’re experiencing turbulence,’ you don’t decide to jump out at the wrong time.”

Applegate on asset allocation: “Whatever portfolio you had on Thursday you should have today. We don’t think the S&P downgrade will be much of a real economy event.”

Dunn on non-cyclical stocks: “Companies are still going to sell products. Johnson and Johnson will still sell medical supplies and Procter and Gamble will still sell soap.”

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Pay Dirt examines the millions of consumer decisions Americans make every day: What to buy, how much to pay, whether to rave or complain. Lead written by Quentin Fottrell, the blog examines these interactions, providing readers with news, insight and tips on shopping, spending, customer service, and companies that do right – and wrong – by their customers. Send items, questions and comments to quentin.fottrell@dowjones.com or tweet @SMPayDirt.